SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number: 0-22464
KOALA CORPORATION
(Name of Small Business Issuer in Its Charter)
Colorado 84-1238908
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5031 South Ulster Street, Suite 300
Denver, Colorado 80237
(Address of Principal Executive Offices)
(303) 770-3500
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 par value
----------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
_X_ Yes ___ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. _______
State the issuer's revenues for its most recent fiscal year: $13,621,292
As of February 27, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the issuer computed by reference to the last quoted price at
which such stock sold on such date as reported by the NASDAQ National Market
System was approximately $23,391,558.
As of February 27, 1998, there were outstanding 2,527,362 shares of the issuer's
Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements that describe the Company's
business and the expectations of the Company and management. All statements,
other than statements of historical facts, included in this report that address
activities, events or developments that the Company expects, believes, intends
or anticipates will or may occur in the future, are forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results, financial and otherwise, could
differ materially from those set forth in or contemplated by the forward-looking
statements herein. These risks and uncertainties include, but are not limited
to, the Company's reliance on the revenues from a major product, the Koala Bear
Kare(R) Baby Changing Station, which has generated a substantial amount of the
Company's revenues; the uncertainties associated with the introduction of new
products; management of growth, including the ability to attract and retain
qualified employees; the ability to integrate its Delta Play acquisition and any
other acquisition that the Company may make and the costs associated with such
acquisitions; dependence on Mark Betker, its chief executive officer;
substantial competition from larger companies with greater financial and other
resources than the Company; the success of its Koala Kare marketing strategy;
its dependence on suppliers for manufacture of some of its products; currency
fluctuations and other risks associated with foreign sales and foreign
operations; quarterly fluctuations in revenues, income and overhead expense; and
potential products liability risk associated with its existing and future
products.
GENERAL
The Company is an integrated provider of children's protection and activity
products targeted at commercial organizations seeking to create "family
friendly" atmospheres for their patrons and customers. As more parents are
taking their children with them on business and recreational outings, commercial
businesses have recognized the value of attracting these customers by offering
the Company's products. The Company's protection and activity products are
designed to assist parents in commercial environments with children ranging in
age from newborn infants to ten years old.
The Company is a leading producer of infant diaper changing stations and other
commercial childcare, child protection and activity products. The Company
markets its products under the Koala Bear Kare(R) name. The Company effectively
created the market for diaper changing stations. The Koala Bear Kare(R) Baby
Changing Station, introduced in 1987, is installed in approximately 300,000
public restrooms across the United States and in more than 50 countries.
The market for the Company's products has developed as a result of a number of
factors, including the steady birthrate of children. As the number of "baby
boom" children of childbearing age grew, the trend toward dining away from home
with children and the increased emphasis by retail stores, sports facilities,
restaurants and other public facilities on marketing based upon customer service
rather than only upon product and price. The Koala Bear Kare(R) Baby Changing
Station is perceived as an affordable method for such enterprises to
differentiate themselves from their competitors. The Company believes, based in
large part on its success in marketing the Baby Changing Station, and in turn on
the success of its commercial, institutional and recreational purchasers in
using the product to enhance their own image, that the customers and visitors of
such establishments have increasingly come to expect diaper changing stations as
a matter of course.
In August 1996, the Company relocated its offices and employees from St. Paul,
Minnesota to Denver, Colorado and established a new manufacturing relationship
with a Denver firm to manufacture and assemble its child protection products.
Previously, the Company assembled its own products. The location of the
Company's offices near the contract manufacturing operation is an important
factor in maintaining the Company's high quality standards and minimizing
product costs.
BUSINESS STRATEGY
The Company believes that the Koala Bear Kare(R) Baby Changing Station and its
other products have strong brand name recognition. The Company's business
strategy is to capitalize on its strong brand name recognition through
maximizing the market penetration for its Baby Changing Station and development
of new products and to leverage its distribution channels by acquisition of
complementary products. This strategy will also ensure that the Company`s
dependence on revenues from the Baby Changing Stations will be reduced. The
following are the key elements of the Company's strategy:
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MAXIMIZE MARKET PENETRATION OF THE BABY CHANGING STATION AND OTHER
CHILD PROTECTION PRODUCTS. Since its October 1993 initial public
offering, the Company has expanded marketing efforts related to its
Baby Changing Station and other child protection products. The Company
has increased its presence at trade shows and has expanded its
advertising in trade journals, particularly in more focused market
segments and geographical areas. It has expanded its marketing
nationwide and internationally through the creation of a distributor
and dealer network. The Company also is marketing its products to
national accounts such as restaurant chains and franchises and child
care centers, as well as other appropriate end-users. The Company also
has increased its use of direct marketing techniques to sell to
customers that would not be reached by trade shows, journals and
distributors.
EMPHASIZE PRODUCT ENHANCEMENT AND NEW PRODUCT DEVELOPMENT. The Company
has an active product development and enhancement program and
continually seeks to improve its products and create complementary
products.
ACQUIRE COMPLEMENTARY PRODUCTS. The Company intends to continue the
acquisition of new products which it believes it can market to its
target market and dealer network. In August 1994, the Company acquired
molds and intellectual property rights associated with Booster Buddy(R)
booster seats, which are specially designed and engineered for use by
children in movie theaters, auditoriums and similar settings. In March
1996, the Company acquired certain assets of Activities Unlimited, a
privately held developer and distributor of commercial-use waiting room
and educational activity equipment for children. In June 1997, the
Company acquired Delta Play, Ltd. ("Delta"), a Vancouver, British
Columbia-based provider of custom themed indoor and outdoor modular
children's play equipment. Primary customers of Delta include family
entertainment centers, fast food outlets and shopping malls.
PRODUCTS
The Company and its subsidiaries operate in one industry segment consisting of
manufacturing, marketing, selling and distribution of children's protection
products, activity products and equipment to commercial businesses. The
Company's umbrella of products can be broadly categorized as child protection
and care products, child activity products and soft modular play equipment.
Child Protection and Care Products. The Company currently markets the following
products in this category: the Koala Bear Kare(R) Baby Changing Station, the
Koala Bear Kare(R) Child Protection Seat, the Koala Bear Kare(R) Infant Seat
Kradle, the Booster Buddy(R) booster seat and the Koala Bear Kare(R) Highchair.
The Company also markets disposable sanitary paper liners to be used with its
Baby Changing Stations.
All of these products, except for the Infant Seat Kradle and the sanitary paper
liners, are constructed out of durable polyethylene plastic and are highly
resistant to accidental damage or vandalism. The Infant Seat Kradle consists of
a metal frame with a nylon mesh cradle.
Child Activity Products and Systems. The Company markets the following
children's activity products: Koala Bear Kare(R) Block and Maze Activity Table,
Koala Bear Kare(R) Wonder Wall, Koala Bear Kare(R) Activity Center Carpet and
other manipulative accessories. These products are designed for use in
commercial waiting areas of businesses such as auto dealers, retail stores and
professional services. These products are solidly constructed to withstand heavy
use and include hygienic maintenance features. These products are sold
individually or are included in the Koala Kare(R) System. The Koala Kare
System(R) combines selected activity products with interactive video machines
and other interactive products to create a children's activity setting at the
commercial business which allows the parent to shop while their children are
supervised in a safe, clean and child-friendly environment.
Child Modular Play Equipment. The Company markets custom themed indoor and
outdoor modular play equipment. These play systems include traditional modular
designed units with tunnels, walkways, ladders and ball pits. In addition, the
Company creates and produces custom designs that utilize these traditional
components in a themed environment, such as a pirate's ship or jungle tree
house. These products are designed for use in family entertainment centers, fast
food outlets and shopping malls. The play systems are permanently installed and
are constructed to meet or exceed recognized safety standards.
MANUFACTURING
Child Protection and Care Products. A Denver-based plastic supplier manufactures
both the vertical and horizontal models of the Koala Bear Kare(R) Baby Changing
Station and Child Protection Seat. Components are blow-molded to the Company's
specifications, assembled and delivered to the Company. Prior to August 1996,
the Company assembled the products. The Company owns all molds used in the
manufacturing process. The Company currently uses two plastics suppliers and
believes that alternative sources of supply are available if necessary.
The Koala Bear Kare(R) Infant Seat Kradle, the Koala Bear Kare(R) Highchair and
the Booster Buddy(R) booster seat are currently manufactured for the Company by
outside jobbers. The Company believes that other third-party manufacturers are
readily available for these products.
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A major manufacturer of paper products manufactures the bed liners used with the
Company's Baby Changing Station to the Company's specifications.
Child Activity Products. An independent manufacturer located in Denver
manufactures most of these products to the Company's specifications. Some
products are purchased from other outside vendors. The Company believes that
alternative sources of supply are available if necessary.
Child Modular Play Equipment. Components for these systems are either
manufactured to the Company's specifications or purchased from outside vendors.
The Company fabricates certain metal and fiberglass components at its plant
located near Vancouver, British Columbia, Canada. These components are then
assembled by the Company at the plant. The Company owns the majority of the
molds used in the manufacture of specialized components and the Company believes
there are alternative sources of supply for the manufacture of these components.
The Company performs all administrative functions including order processing,
credit and collection, accounting, inventory control and shipping from the
Company's facilities in Denver, Colorado and Vancouver, British Columbia,
Canada, except for container size orders of child protection products, which are
shipped directly from the manufacturers plant in Colorado.
SALES AND MARKETING
Child Protection and Care Products. The Company markets the Baby Changing
Station and the other child protection products to commercial, institutional and
recreational establishments such as restaurants, shopping centers, retail stores
and other facilities with public restrooms, as a means of helping these
establishments enhance their image with customers and visitors by providing
facilities for changing diapers.
The United States Department of Justice estimates that there are over 5,000,000
private establishments which constitute public accommodations such as
restaurants, retail stores and shopping centers, many of which are potential
purchasers of the Company's products. The Company has not estimated the number
of restrooms in such facilities. This estimate does not include commercial,
government, or religious facilities such as office buildings, factories,
churches, or government buildings, some of which are also potential purchasers.
The Company emphasizes the ability of a business that purchases its child
protection and care products to differentiate themselves from their competitors
by providing an added level of service to their customers and visitors. Since
the Company began marketing its Baby Changing Station, the expectations of such
purchasers' customers and visitors have evolved such that the presence of a
diaper changing station like the Koala Bear Kare(R) Baby Changing Station has
now increasingly come to be expected and those establishments without diaper
changing stations are perceived as lacking a necessary service. Therefore, the
Company believes that its Baby Changing Station provides purchasers with a
competitive advantage over their competition who do not offer such a service.
The Company believes that it has achieved widespread brand name recognition of
its products, and its "Koala Bear Kare(R)" trademarks have been important in
marketing the Company's products. Each of the Company's products marketed under
this trademark prominently displays a blue and white sticker with one of the
Company's trademarks.
The Company's products are represented in all 50 states with higher sales
concentrations in more heavily populated states. The Company also markets its
products in foreign countries and estimates that approximately 83 percent of
sales during the most recent year were domestic and 17 percent were foreign.
The Company's marketing strategy has consisted primarily of advertising in trade
journals, attendance and display at various trade shows, and other direct
marketing techniques. The Company believes it has been successful in maintaining
a high profile and obtaining as much publicity as possible by providing members
of the press, particularly those affiliated with appropriate trade journals and
those attending trade shows where the Company displays its products, with
packages of information consisting of prior articles, brochures and
descriptions, and other marketing material. The Company has increased its
marketing budget, in an effort to increase sales of its products to a wider
target market. The Company also has increased its use of direct sales techniques
to sell to customers that would not be reached by trade shows, journals and
distributors.
Historically, most sales have been generated by trade journal advertising, trade
show attendance or direct marketing techniques with little or no direct
solicitation by the Company or its dealers. Although the Company has appointed
dealers to sell the Company's products, most dealers are not granted any
exclusive rights for products or territory. Dealer sales have accounted for a
minority of the Company's domestic sales and a majority of the Company's foreign
sales. In 1997, the Company increased its emphasis on domestic dealer sales,
adding more than 200 new manufacturers sales agents and over 800 new
distributors.
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The Company intends to continue its marketing efforts aimed at trade journal
advertising, trade show attendance, and direct mailings. The Company plans to
focus on more defined market segments and geographic regions. The Company
intends to continue to increase sales to distributors, especially those with
defined markets. In addition, the Company plans to continue its focus on
national accounts.
Child Activity Products. The Company markets these products domestically
primarily through direct sales to commercial customers using various marketing
techniques. The Company also markets directly to national accounts.
International sales are through dealers. These products are marketed and sold in
conjunction with the Company's child protection and care products.
Child Modular Play Equipment. The Company markets and sells its custom indoor
and outdoor modular play equipment through the use of trade journal advertising,
trade show attendance and manufacturer's sales agents. To enhance the sale of
its units, the Company utilizes design engineers to provide unique themed
designs to the customer.
COMPETITION
Child Protection and Care Products. The Company plans to expand this product
area through the attraction of additional dealers and through acquisition of
complementary products. The Company is not aware of any other companies
marketing diaper changing stations intended for the commercial market that have
a greater market share than the Company. The Company is aware of five other
companies, two based in Minnesota, one based in Ohio, one based in Illinois and
one based in New Jersey, marketing products that directly compete with the
Company's Koala Bear Kare(R) Baby Changing Station and Child Protection Seat.
The Company believes that each of such competitors has a substantially smaller
market share than the Company. The Company competes with such competitors based
principally on the basis of brand name recognition, price, quality and customer
service. The Company believes that its Koala Bear Kare(R) products have brand
name recognition that provides the Company with a significant competitive
advantage.
In 1996, a large manufacturer of consumer products, commenced marketing of
products that compete with the Company's Baby Changing Stations. Although this
competitor has not materially affected the Company to date, it has substantially
greater financial and marketing resources than the Company. There are a number
of well-known manufacturers of consumer child safety equipment, furniture and
other juvenile products which are substantially larger and better financed than
the Company. Such companies have not introduced or marketed products directly
competing with the Koala Bear Kare(R) Baby Changing Station or Child Protection
Seat. Although the Company believes that its products will continue to compete
effectively with such other competitors, such manufacturers could reduce the
Company's margins and/or market share. Conversely, the Company believes that
such competition could benefit the Company through expansion of the Company's
markets as a result of increased customer awareness of the types of products
sold by the Company.
Child Activity Products. Competition in the children's activity product area is
mainly from small companies that make similar products. The Company competes in
this market on the basis of product uniqueness, product quality and service.
Child Modular Play Equipment. Competition in indoor and outdoor modular play
equipment is primarily from two larger companies and several smaller companies.
The Company competes in this market on the basis of quality and service. The
Company has been able to differentiate itself from its competitors by providing
a custom themed unit designed to meet the unique needs of the customer.
PATENTS AND TRADEMARKS
Although the Company holds patents related to certain aspects of its products,
the Company does not believe that such patents provide significant protection
against competitors and potential competitors whose products compete and likely
would compete with the Company without infringing upon the Company's patents.
The Company has registered various trademarks, including the "Koala Bear Kare"
name and several variations of the Koala Bear Kare(R) picture which is featured
on the Company's products, and believes that such trademarks are important in
assuring recognition of the Company's products. The Company believes that the
various Koala Bear Kare(R) trademarks are widely recognized. The Company has
also registered the trademark "Booster Buddy" and the registration of the
trademark "Delta Play" is currently being sought.
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REGULATION
The Company's operations are not subject to any significant government
regulations other than those regulations applicable to businesses generally. The
Company is aware of several jurisdictions which have adopted or are considering
adopting regulations requiring parity between men's and women's restrooms in the
installation of diaper changing stations. The number of jurisdictions which have
adopted such regulations is minimal and the Company is unable to assess what
impact, if any, such or similar regulations would have on the Company's sales.
The Company may, in the future, market its current products or other products
developed or acquired by it directly to consumers. If so, the Company's products
would then be subject to the provisions of the Federal Consumer Product Safety
Act and the Federal Hazardous Substances Act (the "Acts") and regulations
promulgated thereunder. The Acts authorize the Consumer Product Safety
Commission (the "CPSC") to protect the public from products which present a
substantial risk of injury. The CPSC can require the repurchase or recall by the
manufacturer of products which are found to be defective and impose fines or
penalties on the manufacturer. Similar laws exist in some states and cities and
in other countries in which the Company may market such products.
The Company's operations in the United States do not involve manufacturing or
activities that would subject it to laws and regulations concerning
environmental issues. The Company's assembly plant in Vancouver, British
Columbia does perform light fabrication activities utilizing paint, metal and
fiberglass. The Company has obtained the necessary permits to conduct these
activities, and the Company believes that they have been conducted in compliance
with Canadian environmental laws and regulations.
EMPLOYEES
The Company had approximately 90 full-time employees at December 31, 1997, with
30 located in the United States and 60 located in Canada. The Company's
employees are not covered by any collective bargaining agreements. Management
believes that relations with its employees are excellent.
FOREIGN OPERATIONS
The Company acquired the assets of Delta, a Canadian based provider of modular
play equipment, in June 1997. The Company created a foreign subsidiary to own
and operate this business. The subsidiary's sales, marketing, administrative,
manufacturing and distribution functions are decentralized. The President of
Delta reports to the Chief Executive Officer of the Company. Strategic planning,
market development and resource allocation are the responsibility of the
President in conjunction with the Company's Chief Executive Officer. The Company
believes that there is no greater known significant risk attendant to the
business conducted by the foreign subsidiary than to that of the Company's
domestic operations.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases, from an unrelated party, approximately 15,000 square feet in
Denver, Colorado for its distribution operations. The lease expires on July 31,
2001. The rent is approximately $6,100 per month, plus operating expenses. The
Company also leases approximately 1,100 square feet of office space in Metairie,
Louisiana for the direct sales operations of the division selling the child
activity products. The rent was approximately $1,125 per month in 1996 and
increased to $1,148 per month in January 1997. This lease expired in February,
1998 and the Company is currently making monthly rental payments. In January
1998, the Company leased offices containing approximately 1,000 square feet to
serve as its corporate headquarters. The rent is approximately $1,000 per month
plus operating expenses. This lease expires on December 31, 2000.
The Company conducts the operations of Delta from a 28,000 square foot plant and
office facility located in Surrey, British Columbia, Canada. The facility is
leased from an unrelated party . The rent is approximately $11,000 per month.
The lease expires in June 1998, and has renewal provisions at the Company's
election.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades on the Nasdaq National Market under the
symbol KARE. The following table sets forth, for the periods indicated, the high
and low sales prices for the Company's Common Stock for each quarter within the
last two fiscal years as reported by Nasdaq. These quotations reflect
inter-dealer prices, without retail markup, markdown or commissions and may not
represent actual transactions.
SALES PRICE
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LOW HIGH
--- ----
YEAR ENDED DECEMBER 31, 1996
First quarter............................ $10 5/8 $19 1/4
Second quarter........................... $16 3/8 $19 1/8
Third quarter............................ $13 3/4 $21
Fourth quarter........................... $12 1/4 $17
YEAR ENDED DECEMBER 31, 1997
First quarter............................ $10 3/4 $14 3/8
Second quarter........................... $ 9 7/8 $16 3/8
Third quarter............................ $14 5/8 $17 1/4
Fourth quarter........................... $14 1/8 $18 1/4
As of February 27, 1998, there were approximately 103 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The Company's
credit agreement contains a restrictive covenant that prohibits the payment of
dividends without the lender's consent. The Company currently intends to retain
any earnings for use in its operations and does not anticipate payment of cash
dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Effective June 1, 1997, the Company acquired the assets of Delta in
consideration for the payment of $4,180,609 in cash and the issuance of 40,000
shares of its Common Stock. The Common Stock was issued to one sophisticated
purchaser in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Over the past two years the Company has experienced consistent growth in sales
and pre-tax profits. Sales have increased from $8,938,232 in 1996 to $13,621,292
in 1997, while pre-tax profits have increased from $2,539,722 in 1996 to
$3,776,609 in 1997. Cash provided by operating activities has increased over
this same period from $1,323,426 in 1996 to $3,535,712 in 1997. Cash provided by
operating activities has been and will be used by the Company for expansion of
its marketing and product lines and for acquisitions. See "Liquidity and Capital
Resources" below.
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COMPONENTS OF REVENUE AND EXPENSES
The Company's revenues are derived primarily from the sale of Baby Changing
Stations, disposable sanitary liners for the Baby Changing Stations, Child
Protection Seats, Infant Seat Kradles, and Booster Buddy seats which are sold
primarily to commercial, institutional, and recreational facilities such as
shopping centers, retail establishments, restaurants, sports and recreational
facilities, and other public buildings. In addition, in furtherance of the
Company's "Koala Kare" strategy, the Company acquired certain assets of
Activities Unlimited, a developer and distributor of commercial-use children's
activities products at the end of first quarter 1996 and Delta, a leading
provider of custom indoor and outdoor modular play equipment, in June 1997. It
is anticipated that revenues from these companies will reduce the Company's
dependency on the sale of Baby Changing Stations.
Cost of sales consists of components manufactured for the Company and direct
labor and manufacturing overhead incurred by the Company. All major components
are manufactured by outside vendors. Direct labor and manufacturing overhead
relate to the assembly of the products. Beginning in September 1996, the Company
sub-contracted out the assembly operations for the Baby Changing Stations, Child
Protection Seats and Infant Seat Kradles.
Selling, general, and administrative expenses consist primarily of executive and
office salaries, related payroll taxes, advertising expenses, and other
miscellaneous selling expenses.
RESULTS OF OPERATIONS
The following table outlines certain items in the Company's income statement as
a percentage of sales for each of the last two years:
Years Ended December 31,
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1996 1997
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Sales............................ 100% 100%
Cost of sales.................... 36 41
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Gross profit..................... 64 59
Selling, general and
administrative expenses.......... 32 31
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Operating income................. 32 28
Other (income) expense........... 2 (1)
Amortization of intangibles...... 1 2
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Income before provision for
income taxes..................... 29 27
Provision for income taxes....... 8 9
- -
Net income....................... 21% 18%
=== ===
1997 COMPARED TO 1996
Sales increased 52% from $8,938,282 in 1996 to $13,621,292 in 1997, as a result
of continued growth in demand for the Company's products. A portion of the sales
revenue increase resulted from sales by Delta, reflecting seven months of
operating activities following the Delta acquisition. In addition, the sales and
marketing strategy implemented by the Company for its other product lines
contributed to the additional sales revenue for 1997 and also provided
diversification of the Company's product line. The Company continued to increase
sales and marketing efforts through focused marketing programs and the addition
of sales personnel during 1997 and 1996.
Gross profit increased to $8,092,750 (59% of sales) compared with $5,696,954
(64% of sales) for 1996. The gross profit percentage for 1997 decreased from the
gross profit percentage achieved for 1996 primarily because of the lower margins
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achieved on Delta's sales along with higher sales of products to distributors at
reduced margins. These gross profit reductions were offset somewhat by gross
margin improvements from price reductions achieved in the cost of raw materials
and component parts and the change to sub-contracted assembly in September 1996.
Selling, general and administrative expenses for 1997 increased to $4,230,988
(31% of sales) from $2,892,095 (32% of sales) for the same period in 1996. Sales
and marketing expenses increased by $1,084,455 during 1997. These cost increases
were due to the inclusion of Delta and the higher level of sales achieved and
included costs for various marketing programs, commissions paid to manufacturers
sales representatives and salaries of the sales and marketing personnel added
during 1997. These costs were incurred in furtherance of the Company's sales and
marketing strategies discussed above. General and administrative expenses
increased $254,438 during 1997 over 1996. The relatively small increase in
general and administrative expense compared to the sales increase was primarily
the result of cost reductions obtained by more efficient management of
collections, accounting and investor relations activities. The Company also
incurred approximately $100,000 in non-recurring personnel recruiting and
employee relocation costs in 1996. These cost reductions offset the cost
increases resulting from the inclusion of Delta's general and administrative
costs for seven months of 1997.
Net income for 1997 was $2,435,912 (18% of sales) compared to net income of
$1,895,540 (21% of sales) for 1996, representing an increase of 29%. The lower
margins obtained from Delta's sales contributed to the decrease in net income as
a percentage of sales. Net income per share (assuming dilution) for 1997
increased 28% to $0.96 per share compared to $0.75 per share for 1996. The
percentage increase in net income per share was slightly lower than the
percentage increase in net income primarily as a result of an increase in common
stock equivalents of 24,883 shares.
1996 COMPARED TO 1995
Sales increased 37% from $6,537,440 in 1995 to $8,938,282 in 1996, as a result
of continued growth in demand for the Company's products. Sales of the Baby
Changing Station accounted for the majority of the total growth in the Company's
sales. Sales of the Booster Buddy, Child Protection Seat and Infant Seat Kradle
increased during the year and the addition of the Activities Unlimited product
line beginning in April 1996 contributed to the increase in total sales. The
sales and marketing strategy implemented by the Company resulted in increased
sales and net income as discussed below, as well as diversification of the
Company's product line.
Gross profit increased to $5,696,954 (64% of sales) during 1996, compared with
$3,985,764 (61% of sales) for 1995. The increase in gross profit as a percentage
of sales was due to price reductions achieved in the cost of raw materials and
component parts and the change to sub-contracted assembly in September 1996. The
Company no longer maintains a manufacturing facility for assembly of its
products thus reducing overhead costs.
Selling, general and administrative expenses were $2,892,095 (32% of sales) for
1996 compared with $1,543,495 (24% of sales) for 1995, an 87% increase in terms
of actual dollars; however, the percentage relationship to sales increased only
9 percentage points because the Company has increased sales without a
proportionate increase in general and administrative overhead. The increase in
selling, general, and administrative expenses is primarily due to increased
sales, marketing and administrative salaries, which includes the salary for the
chief financial officer added in 1996, as well as approximately $100,000 in
non-recurring personnel recruiting and employee relocation costs. In addition,
the Company experienced increased advertising costs and other costs associated
with sales and marketing including travel, telephone, consultants and contract
labor. The Company also increased its use of outside sales representatives which
resulted in an increase in sales commissions. The Company made the investment in
these increased levels of selling, general and administrative expenses in order
to support the expanded sales and marketing strategies begun in 1995.
Net income for 1996 was $1,895,540 (21% of sales) compared to net income of
$1,574,696 (24% of sales) for 1995, representing an increase of 20%. The
additional expenses incurred as discussed above resulted in the decline in net
income as a percent of sales; however, the Company believes that the investment
in these areas will result in continued sales growth in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its business activities primarily from cash provided by
operating activities. Cash provided by operating activities for 1996 and 1997
was $1,323,426 and $3,535,712, respectively. The Company completed 1996 and 1997
with working capital of $5,643,924 and $3,945,110, respectively, and cash
balances of $3,442,601 and $1,832,677 at December 31, 1996 and 1997,
respectively.
The Company has historically utilized its operating cash flow to expand the
Company's marketing activities, for product development, and acquisitions of new
products and companies as well as for working capital purposes. As discussed
above, in June 1997 the Company utilized $4,634,802 in cash generated during the
first six months of 1997 and existing cash reserves to purchase certain assets
of Delta. This is the principal reason for the decrease in working capital and
cash balances at December 31, 1997.
In anticipation of the impact of the Delta acquisition on cash reserves and
working capital, the Company obtained a $2.0 million line of credit from a bank.
Management expects to utilize the credit facility periodically for short-term
9
<PAGE>
working capital needs and for short-term financing of future acquisitions. The
interest rate on amounts borrowed under the line of credit ranges from LIBOR
plus 2.25% to LIBOR plus 2.75%. There were no borrowings against the line of
credit as of December 31, 1997.
The Company has developed a plan to make its information technology ready for
the year 2000 and believes that its critical data processing systems are
currently ready for the year 2000. Although the Company has not initiated formal
communications with all of its significant suppliers and customers to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to make their own systems Year 2000 compliant, the
Company does not foresee any significant problems with this issue.
INCOME TAXES
During 1997, the Company's effective tax rate normalized to an overall rate of
35.5% for combined state, federal and foreign corporate income taxes. The
Company will file a Canadian corporate income tax return with an effective
income tax rate of 38.9%. However, the Company will receive a foreign tax credit
against its domestic state and federal corporate income tax liability.
Future effective tax rates are expected to be approximately 36%.
The Company's effective tax rate declined in 1996 compared to prior years due to
the Company's move to Colorado, which has lower state income tax rates than
Minnesota. The Company also realized a tax benefit from the tax deduction
generated by the exercise of non-qualified stock options by a former officer of
the Company, resulting in an overall effective tax rate of 25%.
NEW ACCOUNTING STANDARDS
SFAS No. 128, EARNINGS PER SHARE, was issued in February 1997 and was adopted by
the Company effective for 1997. Earnings per share amounts for 1996 were
restated in accordance with the provisions of SFAS No. 128. See Note 1 to the
Financial Statements.
On June 30, 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position, and is effective for the Company's fiscal year ending December 31,
1998. Management intends to comply with the disclosure requirements of this
statement.
The FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, on June 30, 1997. This statement establishes additional
standards for segment reporting in the financial statements and is effective for
the Company's fiscal year ended December 31, 1998. Management intends to comply
with the disclosure requirements of this statement and does not anticipate a
material impact on the results of operations of each segment.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Blanski Peter Kronlage & Zoch, P.C. acted as the Company's
independent auditors for the fiscal year ended December 31, 1996. In April 1997,
the Company's Board of Directors retained Ernst & Young LLP as the Company's
independent public accountants and replaced the Company's former auditors,
Blanski Peter Kronlage & Zoch, P.C. There were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's financial statements for the fiscal year ended December 31, 1996 or up
through the time of replacement which, if not resolved to the former auditors'
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. Prior to retaining Ernst &
Young LLP, the Company had not consulted with Ernst & Young LLP regarding
accounting principles.
10
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 is incorporated herein by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders, which
will be filed with Securities and Exchange Commission within 120 days of the
Company's fiscal year ended December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders, which
will be filed with Securities and Exchange Commission within 120 days of the
Company's fiscal year ended December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders, which
will be filed with Securities and Exchange Commission within 120 days of the
Company's fiscal year ended December 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders, which
will be filed with Securities and Exchange Commission within 120 days of the
Company's fiscal year ended December 31, 1997.
11
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Articles of Incorporation of Koala Corporation.(1)
3.2 Bylaws of Koala Corporation.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 Omitted.
10.2 Incentive Stock Option Plan dated August 19, 1993.(1)
10.3 Omitted.
10.4 Nondisclosure and Noncompetition Agreement between Koala
Corporation and Jeff H. Hilger dated as of July 12, 1993.(1)
10.5 Omitted.
10.6 Nondisclosure and Noncompetition Agreement between Koala
Corporation and Robert Dainty dated as of July 12, 1993.(1)
10.7 Nondisclosure and Noncompetition Agreement between Koala
Corporation and James P. Galarneault dated as of July 12,
1993.(1)
10.8 Omitted.
10.9 Omitted.
10.10 Koala Corporation 1995 Stock Option Plan.(2) 10.11 Industrial
Lease dated August 1, 1996 between Buckhead
Industrial Properties, Inc. and Koala Corporation. (3)
10.12 Agreement for Sale and Purchase of Assets dated June 23, 1997
between Delta Play, Ltd, et al and Koala Corporation. (4)
10.13 Registration Rights Agreement dated June 23, 1997 between
Delta Play, Ltd, and Koala Corporation. (5)
21.1* Subsidiaries.
23.1* Independent Auditors' Consent of Ernst & Young LLP.
23.2* Independent Auditors' Consent of Blanski Peter Kronlage &
Zoch, P.A.
27.1* 1997 Financial Data Schedule.
27.2* 1996 Financial Data Schedule, restated.
------------------------------------------------------------------
* Filed herewith.
(1) Incorporated by reference to the same exhibit number
included in the Company's Registration Statement on Form
SB-2, Registration No. 33-68482C.
(2) Incorporated by reference to Exhibit 10.10 of the
Company's Form 10-KSB for the year ended December 31, 1995.
(3) Incorporated by reference to Exhibit 10.11 of the Company's Form
10-KSB for the year ended December 31, 1996.
(4) Incorporated by reference to Exhibit 2.1 of the Company's Form
8-K filed on July 8, 1997.
(5) Incorporated by reference to
Exhibit 4.1 of the Company's Form 8-K filed on July 8, 1997.
(b) Reports on Form 8-K.
None.
12
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities and Exchange Act of 1934, the
registrant caused this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOALA CORPORATION
Date: March 27, 1998 By: /s/ Mark A. Betker
-------------- -------------------
Mark A. Betker, Chairman,
Chief Executive Officer and President
Date: March 27, 1998 By: /s/ Jeffrey L. Vigil
-------------- ---------------------
Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report on Form 10-KSB has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:
Signature Title Date
/s/ Mark A. Betker Chairman, Chief Executive Officer March 27, 1998
- --------------------------- and President (Principal Executive
Mark A. Betker Officer)and Director
/s/ Michael C. Franson Director March 27, 1998
- ---------------------------
Michael C. Franson
/s/ Thomas W. Gamel Director March 27, 1998
- ---------------------------
Thomas W. Gamel
/s/ John T. Pfannenstein Director March 27, 1998
- ---------------------------
John T. Pfannenstein
/s/ Ellen Robinson Director
- --------------------------- March 27, 1998
Ellen Robinson
13
<PAGE>
KOALA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Reports F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
DENVER, COLORADO
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying balance sheet of KOALA CORPORATION (a Colorado
corporation) as of December 31, 1996, and the related statement of income,
changes in shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KOALA CORPORATION, as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
BLANSKI PETER KRONLAGE & ZOCH, P.A.
Minneapolis, Minnesota
February 12, 1997
SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
DENVER, COLORADO
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of KOALA CORPORATION
(a Colorado corporation) as of December 31, 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KOALA CORPORATION,
at December 31, 1997, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 10, 1998
F-2
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31 December 31
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents ....................................... $ 1,832,677 $ 3,442,601
Accounts receivable, trade ( less allowance for doubtful accounts
of $45,703 in 1997 and $30,000 in 1996) 2,212,802 1,656,515
Refundable income taxes ......................................... 74,523 338,200
Inventories ..................................................... 1,103,355 443,680
Prepaid expenses ................................................ 416,120 82,460
Deferred income taxes ........................................... 14,314 10,900
---------- ----------
Total current assets ............................................. 5,653,791 5,974,356
---------- ----------
Property and equipment ............................................ 1,561,324 863,285
Less accumulated depreciation and amortization.................... 322,616 165,496
---------- ----------
1,238,708 697,789
---------- ----------
Other Assets:
Intangibles (net of accumulated amortization
of $496,221 in 1997 and 295,360 in 1996) ........................ 8,064,301 3,679,057
---------- ----------
8,064,301 3,679,057
---------- ----------
$ 14,956,800 $ 10,351,202
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 1,312,518 $ 273,511
Accrued expenses and income taxes ............................... 396,163 56,921
---------- ----------
Total current liabilities .................................... 1,708,681 330,432
---------- ----------
Deferred income taxes ............................................. 398,047 242,200
---------- ----------
Commitments and contingencies (Notes 3 and 4)
Shareholders' Equity:
Preferred stock, no par value; 1,000,000 shares authorized;
issued and outstanding - none --- ---
Common stock, $.10 par value; 10,000,000 shares authorized;
issued and outstanding - 2,527,362 in 1997 - 2,481,260 in 1996 252,736 248,126
Additional paid-in capital ...................................... 5,307,988 4,651,884
Equity adjustment from foreign currency translation (25,124) --
Retained earnings ............................................... 7,314,472 4,878,560
--------- ---------
12,850,072 9,778,570
---------- ---------
$ 14,956,800 $ 10,351,202
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1997 1996
----------- ----------
<S> <C> <C>
Sales $13,621,292 $8,938,282
Cost of sales 5,528,542 3,241,328
--------- ---------
Gross profit 8,092,750 5,696,954
Selling, general and administrative expenses 4,230,988 2,892,095
--------- ---------
Income from operations 3,861,762 2,804,859
--------- ---------
Other (income) expense:
Interest income (115,708) (129,463)
Relocation expenses --- 288,923
Amortization of intangibles 200,861 105,677
--------- ---------
85,153 265,137
--------- ---------
Income before income taxes 3,776,609 2,539,722
Provision for income taxes 1,340,697 644,182
--------- ---------
Net income $2,435,912 $1,895,540
========== ==========
Net income per share $0.97 $0.78
========== ==========
Weighted average shares outstanding 2,503,654 2,431,016
========== ==========
Net income per share - assuming dilution $0.96 $0.75
========== ==========
Weighted average shares outstanding - assuming dilution 2,548,148 2,523,265
========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Equity
Adjustment
Additional From Foreign
Common Stock Paid-In Currency Retained
Shares Amount Capital Translation Earnings Total
------ ------ ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ......... 2,399,312 $ 239,931 $ 4,639,179 $ -- $ 2,983,020 $ 7,862,130
Issuance of common stock, exercise
of options and warrants (cashless) 81,948 8,195 (8,195) --
Issuance of 2,200 warrants ......... 20,900 20,900
Net income ......................... 1,895,540 1,895,540
--------- ---------- ---------- --------- --------- ---------
Balance, December 31, 1996 ......... 2,481,260 248,126 4,651,884 4,878,560 9,778,570
Issuance of common stock for
acquisition of Delta Play, Ltd. ... 40,000 4,000 596,000 600,000
Issuance of common stock for
exercise of warrants .............. 6,102 610 60,104 60,714
Translation adjustment ............. (25,124) (25,124)
Net income ......................... 2,435,912 2,435,912
--------- ----------- ----------- ----------- --------- ----------
Balance, December 31, 1997 ......... 2,527,362 $ 252,736 $ 5,307,988 ($ 25,124) $ 7,314,472 $12,850,072
========= =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,435,912 $1,895,540
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 163,133 83,148
Amortization 200,861 105,677
Loss on disposal of property and equipment -- 31,796
Deferred income taxes 152,433 (18,852)
(Increase) decrease in assets:
Accounts receivable, trade (416,618) (683,191)
Refundable income taxes 263,677 (172,815)
Inventories (106,791) (80,410)
Prepaid expenses (313,293) (35,942)
Increase (decrease) in liabilities:
Accounts payable 818,509 177,492
Accrued expenses 157,125 20,983
Accrued income taxes 180,764 --
--------- ---------
Net cash provided by operating activities 3,535,712 1,323,426
--------- ---------
Cash flows from investing activities:
Payments for capital expenditures (520,321) (367,264)
Purchase of Activities Unlimited, LLC -- (501,188)
Purchase of Delta Play, Ltd., net of cash acquired (4,634,802) --
Payments for patents and intangibles (21,730) (6,503)
---------- -----------
Net cash used by investing activities (5,176,853) (874,955)
---------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock warrants 39,633 --
----------- -----------
Net cash provided by financing activities 39,633 --
----------- -----------
Effect of exchange rate changes on cash (8,416) --
Net (decrease) increase in cash (1,609,924) 448,471
Cash at beginning of year 3,442,601 2,994,130
--------- ---------
Cash at end of year $1,832,677 $3,442,601
========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KOALA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Summary of significant accounting policies:
Nature of operations:
Koala Corporation and its wholly owned subsidiaries (the "Company") is
engaged in developing, designing, manufacturing, distributing, and
marketing infant and child protection products, children's activity
furniture and children's play equipment for commercial, institutional
and recreational establishments. Its products include diaper changing
stations, child protection seats, infant seat cradles, a child booster
seat, block and wire maze activity tables and custom indoor and outdoor
modular play systems.
Principles of consolidation:
The consolidated financial statements include the accounts of Koala
Corporation and all subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The
operations of Delta Play, Ltd. are included in the accompanying
financial statements from June 1, 1997, the effective date of its
acquisition. See note 10 below.
Relocation:
The Company completed the relocation of its executive offices from St.
Paul, Minnesota to Denver, Colorado during the third quarter of 1996.
Total relocation costs were $289,000. The Company also established a
new manufacturing relationship with a Denver firm to manufacture and
assemble its products. Previously, the Company assembled its own
products.
Use of estimates:
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenue and expenses. Actual results could vary from
the estimates that were used.
Cash and cash equivalents:
Cash and cash equivalents include cash on hand, demand deposits,
savings accounts, and short-term investments with original maturities
of three months or less. Cash and cash equivalents include financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, cash held in the
Company's primary bank may be in excess of the FDIC insurance limit.
Cash in money market mutual funds is not federally insured. The Company
performs periodic evaluations of the relative credit standing of these
financial institutions. As of December 31, 1997 and 1996, cash and cash
equivalents approximate fair value and consisted of the following:
1997 1996
----- ----
Cash in primary banking institution $ 863,084 $ 459,364
Cash in money market mutual funds 969,593 2,983,237
--------- ---------
$ 1,832,677 $ 3,442,601
=========== ===========
Inventories:
Inventories are stated at the lower of first-in, first-out cost
(including manufacturing overhead applied to finished goods) or market.
As of December 31, 1997 and 1996, inventories consisted of the
following:
F-7
<PAGE>
1. Summary of significant accounting policies (continued):
1997 1996
---- ----
Raw materials $ 605,066 $ 62,879
Finished goods 498,289 380,801
--------- ---------
$1,103,355 $ 443,680
=========== =========
Property and equipment:
Property and equipment is stated at the lower of depreciated cost or
net realizable value. Depreciation and amortization is being provided
on the straight-line method over the estimated useful lives of the
assets. The following is a schedule of estimated useful lives of
property and equipment:
Furniture and fixtures 7 years
Tooling and molds 6-10 years
Shop and office equipment 3-10 years
Intangibles:
Acquisition intangibles represent the excess of the cost of the
companies acquired over the fair value of their net assets at the date
of acquisition. Acquisition intangible costs are being amortized on the
straight-line method using an estimated useful life of up to 40 years.
Costs of obtaining patents and trademarks are capitalized and amortized
on the straight-line basis over 17 years for patents and 20 years for
trademarks once approval is granted. Costs are expensed if approval is
denied.
Revenue recognition:
The Company recognizes revenues at the time its products are shipped.
Research and development costs:
Research and development costs are expensed when incurred. The
Company's research and development costs were not significant in 1997
or 1996.
Advertising costs:
Advertising costs are expensed when incurred. Advertising expense for
the periods ended December 31, 1997 and 1996 was $405,178 and $728,528
respectively. Prepaid advertising costs at December 31, 1997 and 1996
were $35,724 and $29,508, respectively, and consist of costs of
advertising which have not taken place.
Income taxes:
The Company provides for deferred taxes on temporary differences
arising from assets and liabilities whose bases are different for
financial reporting and state, federal and foreign income tax purposes.
The differences relate primarily to depreciable and amortizable assets
and the allowance for uncollectible accounts.
The Company does not provide US income taxes on the unremitted earnings
of its foreign subsidiary ($290,337 at December 31, 1997) because the
Company intends to reinvest such unremitted earnings. Where it is
contemplated earnings may be remitted from the foreign subsidiary, the
credit for foreign taxes already paid generally offsets applicable
federal income taxes.
Net income per share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings
per share amounts for all periods were restated to conform to the
Statement 128 requirements.
F-8
<PAGE>
1. Summary of significant accounting policies (continued):
There is no difference between after tax earnings for calculation of
basic earnings per share versus diluted earnings per share. The
reconciliation of the weighted average shares outstanding for purposes
of calculating basic earnings per share versus diluted earnings per
share is as follows:
1997 1996
---- ----
Weighted average shares
outstanding for basic
earnings per share 2,503,654 2,431,016
Effect of dilutive securities:
Employee stock options 39,666 79,448
Warrants 4,828 12,801
--------- ---------
Dilutive potential common shares 44,494 92,249
--------- ---------
Weighted average shares
outstanding for diluted
earnings per share 2,548,148 2,523,265
========= =========
Foreign Currency Translation:
The financial statements of the Company's subsidiary located outside
the United States are measured using the local currency as the
functional currency. Assets and liabilities of this subsidiary are
translated at the rates of exchange at the balance sheet date. The
resultant translation adjustments are included in equity adjustment
from foreign currency translation, a separate component of
shareholders' equity. Income and expense items are translated at
average rates of exchange. Gains and losses on foreign currency
transactions of these subsidiaries are included in net earnings.
Geographic Area Data:
The Company operates in one principal industry segment: the design,
manufacture and sale of children's protection and activity products.
The Company's products are sold primarily to the commercial and
governmental markets. Geographically, sales, operating income and
identifiable assets for non-domestic entities for the year ended
December 31, 1997 were $3,189,800, $439,000 and $1,931,400,
respectively. There were no material amounts of sales or transfers
among geographic areas during 1997.
2. Credit Facility:
The Company obtained a $2.0 million unsecured line of credit in June
1997. The line of credit may be used for short-term working capital
needs and future acquisitions. There are no compensating balance
requirements and the credit facility requires compliance with financial
loan covenants related to debt levels compared to annualized cash flows
from operations. The credit facility terminates on June 24, 1998. There
were no amounts outstanding under the credit facility as of December
31, 1997.
3. Commitments and contingencies:
Operating lease:
The Company has entered into operating leases for facilities located in
Denver, Colorado, New Orleans, Louisiana and Surrey, British Columbia,
Canada.
The lease terms vary and run through July 31, 2001. All leases call for
monthly base rents, with the Company responsible for its share of
common building operating costs, payable on a monthly basis.
Facilities rent expense was $187,719 and $85,146 for years ending
December 31, 1997 and 1996, respectively. Total minimum operating lease
commitments for the years ending December 31 are:
F-9
<PAGE>
3. Commitments and contingencies (continued):
Year Ended December 31, Amount
----------------------- ------
1998 $ 122,841
1999 85,440
2000 85,440
2001 42,931
---------
$ 336,652
=========
Warranties:
The Company provides a replacement guarantee for one year from purchase
protecting against damage from natural disasters or vandalism, subject
to a $100 deductible. The Company also provides a five year warranty on
parts and labor covering any defects in workmanship. The Company has
experienced minimal returns and warranty claims; therefore, as of
December 31, 1997 and 1996, no accrual has been made for future claims.
4. Stock options and warrants:
Options:
The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The
1993 Plan provides that options to purchase up to 100,000 shares of
common stock may be granted. The Company adopted a second plan in
November 1995 (1995 Plan) which provides that additional options to
purchase up to 400,000 shares of common stock may be granted. The
exercise price of each option is equal to the market price of the
Company's stock on the date of grant. The option term varies, as well
as the vesting periods, at the discretion of the Board of Directors.
The Company applies APB Opinion 25 in accounting for its stock based
compensation plans. Accordingly, no compensation cost has been
recognized for the plan in 1997 and 1996. Had compensation cost been
determined on the basis of fair value pursuant to FASB Statement No.
123, net income and earnings per share would have been presented as
follows:
Net income 1997 1996
---------- ---- ----
As reported $ 2,435,912 $ 1,895,540
=========== ===========
Pro forma (FASB 123) $ 2,259,337 $ 1,713,373
=========== ===========
Basic earnings per share
As reported $ .97 $ .78
========== ==========
Pro forma (FASB 123) $ .90 $ .70
========== ==========
Diluted earnings per share
As reported $ .96 $ .75
========== ==========
Pro forma (FASB 123) $ .89 $ .68
========== ==========
F-10
<PAGE>
4. Stock options and warrants (continued):
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
Assumption 1997 1996
---------- ---- -----
Dividend yield 0.00% 0.00%
Risk-free interest rate
5 year 5.71% 5.38%
2 year - 5.18%
Expected life 5 years 2 to 5 years
Expected volatility 38.70% 30.47%
Following is a summary of the status of the plans during 1997 and 1996:
Number of Weighted Average
Shares Exercise Price
------ --------------
Outstanding 12/31/95 347,500 $10.18
Surrendered - 1996 (46,783) $7.94
Exercised - 1996 (50,717) $7.93
--------
Outstanding 12/31/96 250,000 $11.25
Granted - 1997 33,000 $13.54
------
Outstanding 12/31/97 283,000 $11.52
=======
In 1997, no options were exercised. In 1996, 46,783 options were exercised in a
cashless exercise; 50,717 shares were issued.
1997 1996
---- ----
Options exercisable 103,000 50,000
======= ======
Weighted average fair value of
options granted during the year $ 5.76 $ 0.00
====== ======
A summary of the status of fixed options outstanding at December 31,
1997 is as follows:
Outstanding Options Exercisable Options
------------------------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Price Number Life Price Number Price
----- ------ ---- ----- ------ -----
$ 9.25 to
$11.25 151,000 8.0 years $9.92 61,000 $9.92
$13.00 to
$15.00 132,000 8.5 years $13.34 52,000 $13.24
F-11
<PAGE>
4. Stock options and warrants (continued):
The Company acquired Activities Unlimited in March 1996. A portion of
the purchase price is in the form of options to purchase common stock
of the Company. Options are granted to the sellers of Activities
Unlimited based on operations during the first two years following the
closing of the acquisition (March 1997 and 1998). Options to purchase
1,000 shares will be granted for each $25,000 of product line
contribution, will be fully vested when granted and will be exercisable
at date of grant, expiring 5 years after date of grant. The exercise
price will be the fair market value of a share of stock on the date of
grant. As of December 31, 1997, 1,000 options had been granted under
this agreement.
Warrants:
The Company granted to the underwriter of its 1993 stock offering, for
nominal consideration, warrants to purchase up to 70,000 shares of its
common stock at $7.20 per share, beginning in October 1994 and expiring
in October 1999. In January 1996, the underwriter exercised the
warrants in a cashless transaction, receiving 31,231 shares and
surrendering 38,769 warrants.
The Company acquired the assets of A & B Booster, Inc. in 1994. A
portion of the purchase price is in the form of warrants to purchase
common stock at an exercise price of $6.50 per share. Warrants were
issuable to the sellers of A & B Booster based on 100 shares of common
stock of the Company for each whole multiple of $10,000 of Booster
Buddy sales in each of the three years beginning August 1, 1994, 1995
and 1996. The warrants were exercisable at any time prior to January 1,
1998. As of December 31, 1997, all warrants had been surrendered and
6,102 shares of common stock had been issued. At of December 31, 1996,
there were 3,900 warrants outstanding.
5. Income taxes:
<TABLE>
<CAPTION>
The components of the provision for income tax were:
1997
---------------------------------------------------------------------
Federal Foreign State Total
------- ------- ----- -----
<S> <C> <C> <C> <C>
Current tax expense $ 963,764 $ 159,798 $ 64,702 $ 1,188,264
Deferred tax expense 152,406 -- 27 152,433
------------- ------------- -------- --------------
Provision for income taxes $ 1,116,170 $ 159,798 $ 64,729 $ 1,340,697
============= ============= ======== ==============
1996
---------------------------------------------------------------------
Federal Foreign State Total
Current tax expense $ 600,306 $ -- $ 62,728 $ 663,034
Deferred tax (benefit) (15,170) -- (3,682) (18,852)
------------- ----------- -------- -------------
Provision for income taxes $ 585,136 $ $ 59,046 $ 644,182
============ =========== ======== ============
</TABLE>
The Company's net deferred tax asset and liability consists of:
1997
-----------------------------------
Federal State Total
Deferred income tax asset (current) $ 13,538 $ 776 $ 14,314
Deferred income tax liability (non-current) (376,459) (21,588) (398,047)
--------- -------- --------
$(362,921) $(20,812) $(383,733)
========= ======== ==========
F-12
<PAGE>
5. Income taxes (continued):
1996
-----------------------------------
Federal State Total
------- ----- -----
Deferred income tax asset (current) $ 9,850 $ 1,050 $ 10,900
Deferred income tax liability
(non-current) (218,850) (23,350) (242,200)
--------- --------- ----------
$(209,000) $(22,300) $(231,300)
========= ======== =========
The effective tax rate differs from the statutory rate as follows:
1997 1996
---- ----
Federal statutory rate 34.0% 34.0%
Foreign taxes in excess of federal statutory rate 4.6 -
Tax benefit of foreign tax credit (4.4) -
State income taxes - net of federal effect 1.7 2.4
Effect of difference in tax basis of goodwill (1.1) (1.5)
Cumulative effect of change in estimated
effective state income tax rate - (3.3)
Tax basis of non-qualified stock options exercised - (5.6)
Miscellaneous tax adjustments .7 ( .6)
-- --
Effective tax rate 35.5% 25.4%
===== =====
6. Major suppliers:
For the periods ended December 31, 1997 and 1996, the Company purchased
a significant amount of component parts from three vendors which
accounted for approximately 47% and 69% of the Company's total cost of
sales, respectively.
7. Supplemental cash flow information:
1997 1996
----------- ---------
Interest received $ 104,839 $ 129,463
=========== ===========
Interest paid $ 989 $ -
=========== ===========
Income taxes paid $ 872,304 $ 835,849
=========== ===========
8. 401(k) Plan:
Effective January 1997, the Company adopted a 401(k) Plan for the
benefit of substantially all of its U.S. employees meeting specified
eligibility requirements. The Plan permits contributions by the Company
but does not require them.
The Company made no contributions to the Plan during 1997.
9. Preferred stock:
During 1996 the shareholders voted to amend the Articles of
Incorporation to provide for the issuance of 1,000,000 shares of no par
value preferred stock. At December 31, 1997 and December 31, 1996, none
were outstanding. The Board of Directors is granted authority to
determine dividends on the preferred stock.
F-13
<PAGE>
10. Acquisitions:
On June 23, 1997, the Company acquired substantially all of the assets
of Delta Play, Ltd. (Delta), a leading provider of custom indoor and
outdoor modular play equipment based in Vancouver, British Columbia.
The acquisition was effective June 1, 1997 and was accounted for as a
purchase. Results of operations of Delta were included in the Company's
consolidated statements of income beginning on the effective date.
As initial consideration, the Company paid $4,180,609 cash and issued
40,000 shares of Koala Corporation common stock valued at $600,000. In
addition, costs related to the acquisition of approximately $455,559
were incurred and capitalized as goodwill. The purchase agreement also
provides for additional consideration in the form of cash payments if
certain operating performance criteria are met by Delta over the
twelve-month period from June 1, 1997 to May 31, 1998. The range of
additional consideration is C$900,000 (US$648,000) to C$1,500,000
(US$1,080,000). If minimum performance is not achieved, no additional
consideration will be payable. Any subsequent payment will be allocated
to cost in excess of the fair value of assets acquired.
The pro forma unaudited results of operations for the twelve months
ended December 31, 1997 and 1996, assuming consummation of the purchase
as of January 1, 1997 and 1996, are as follows:
Twelve Months Ended December 31
1997 1996
---- ----
Sales $15,499,336 $13,526,902
Net income $2,513,770 $2,167,408
Net income per share $0.98 $0.85
(assuming dilution)
In March 1996, the Company acquired all of the operating assets of
Activities Unlimited, LLC for $500,000 paid in cash. The Company
markets children's recreational and activity products under the
Activities Unlimited product line, including commercial-use children's
play tables featuring interlocking construction blocks, games, mazes,
wall activities and other manipulative products.
F-14
.
EXHIBIT 21.1
Subsidiaries of the Company
Name of Subsidiary Jurisdiction of Incorporation Percentage Ownership
------------------ ----------------------------- --------------------
Delta Play (US), Inc. State of Colorado 100%
Delta Play Company Province of Nova Scotia, Canada 100%
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following registration
statements of Koala Corporation and in the related prospectuses of our report
dated February 10, 1998, with respect to the consolidated financial statements
of Koala Corporation incorporated by reference in this Form 10-KSB for the year
ended December 31, 1997:
1. Registration Statement on Form S-3 (No. 33-85388) pertaining to the
registration of 475,332 shares of Koala Corporation Common Stock.
2. Registration Statement on Form S-8 (No. 33-90134) pertaining to the
registration of 200,000 shares of Koala Corporation Common Stock.
ERNST & YOUNG LLP
Denver, Colorado
March 27, 1998
EXHIBIT 23.2
REPORT OF INDEPENDENT AUDITORS
We consent to the use in the Registration Statements and the prospectus on Form
S-8 dated March 8, 1995 and the prospectus on Form S-3 dated February 1, 1996 of
Koala Corporation of our report dated February 12, 1997, on the financial
statements of Koala Corporation for the year ended December 31, 1996
incorporated by reference in the Registration Statements, and to the use of our
name and the statements with respect to us under the heading "Experts" in such
Prospectus.
BLANSKI PETER KRONLAGE & ZOCH, P.A.
Minneapolis, Minnesota
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,832,677
<SECURITIES> 0
<RECEIVABLES> 2,258,505
<ALLOWANCES> (45,703)
<INVENTORY> 1,103,355
<CURRENT-ASSETS> 5,653,791
<PP&E> 1,561,324
<DEPRECIATION> (322,616)
<TOTAL-ASSETS> 14,956,800
<CURRENT-LIABILITIES> 1,708,681
<BONDS> 0
0
0
<COMMON> 252,736
<OTHER-SE> 12,597,336
<TOTAL-LIABILITY-AND-EQUITY> 14,956,800
<SALES> 13,621,292
<TOTAL-REVENUES> 13,621,292
<CGS> 5,528,542
<TOTAL-COSTS> 5,528,542
<OTHER-EXPENSES> 4,431,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,776,609
<INCOME-TAX> 1,340,697
<INCOME-CONTINUING> 2,435,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,435,912
<EPS-PRIMARY> .97
<EPS-DILUTED> .96
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,442,601
<SECURITIES> 0
<RECEIVABLES> 1,686,515
<ALLOWANCES> (30,000)
<INVENTORY> 443,680
<CURRENT-ASSETS> 5,974,356
<PP&E> 863,285
<DEPRECIATION> (165,496)
<TOTAL-ASSETS> 10,351,202
<CURRENT-LIABILITIES> 330,432
<BONDS> 0
0
0
<COMMON> 248,126
<OTHER-SE> 9,530,444
<TOTAL-LIABILITY-AND-EQUITY> 10,351,202
<SALES> 8,938,282
<TOTAL-REVENUES> 8,938,282
<CGS> 3,241,328
<TOTAL-COSTS> 3,241,328
<OTHER-EXPENSES> 3,157,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,539,722
<INCOME-TAX> 644,182
<INCOME-CONTINUING> 1,895,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,895,540
<EPS-PRIMARY> .78
<EPS-DILUTED> .75
</TABLE>
